Cisco Dives Into Intelligent Switching With ArrowPoint Buy

New investing adage: Any friend of Cisco's (CSCO) is a friend of mine.

Demonstrating that price is no object when it comes to acquiring leading technology, Cisco agreed Friday to swap $5.7 billion worth of its highflying stock for ArrowPoint (ARPT), which makes smart switches for the Internet that help distribute information more efficiently. Tech investors cheered, on the thinking that the purchase should keep Cisco at the forefront of the Web's fast-growing content-networking field.

At midafternoon Friday, Cisco shares were up 3 3/16, or 5.01%, at 66 13/16, and ArrowPoint shares were up 3 3/16, or 2.36%, at 138.

Inflection Point

"This tells you that the market for intelligent switching for data centers has hit an inflection point," says PBHG's Jeff Wrona, who oversees technology and networking investments and has no position in Cisco.

Investors in both stocks cheered the purchase despite the steep price and the possible dilution to Cisco shareholders. Cisco will pay $38 million per ArrowPoint employee, shattering the record $25 million a head Cisco shelled out in its 1999 purchase of optical gear maker Cerent. Investors in ArrowPoint's March 31 IPO will also make out handsomely: The stock, which was priced at 34, jumped 248% its first day before falling last month to hit a low of 59.

ArrowPoint, located in Acton, Mass., has 150 employees and has been in business for three years. In 1999, the company reported an operating loss of $20.6 million on revenue of $12.4 million. But as always, Cisco is less interested in buying a company than in acquiring an important technology.

Cutting to the Quick

With mushrooming data traffic swamping telecom providers' capacity, or bandwidth, companies like Cisco have been focusing on how to enable quick Internet content delivery. Lately, much of the big players' attention has been focused on the use of data-center gear to store and route information more closely and more efficiently to users.

Now, with Cisco and its rival Nortel (NT) buying cutting-edge technology companies at the rate of two or more a month, investors may be looking at which firms in this area could be the next to go. Other companies populating the intelligent-switching market include Foundry (FDRY), up 2 7/16, or 2.72% at 92 1/8, Extreme (EXTR), up 6 5/16, or 10.7%, at 66 1/8, and Alteon WebSystems (ATON), off 2 29/32, or 4.1%, at 68 1/8.

The race to stay ahead in technology has been driving big networkers like Cisco and Nortel to make big bets, such as this one, rather than risk being left behind. "Is ArrowPoint the right company?" Wrona asks. "I'm not necessarily convinced that it is, but what I am convinced about is that this intelligent switching market is taking off."

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